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How Dow Chemical Can End the Bhopal Tragedy

Why Dow should assume responsibility for the 1984 disaster in Bhopal.

Editor's note: This article has been corrected to reflect that the Bhopal company was majority-owned, not wholly owned, by Union Carbide.

Early in the morning on Dec. 3, 1984, a leaking tank within an insecticide plant unleashed approximately 45 tons of a toxic gas in the northern area of Bhopal, a city in central India. The poisonous gas cloud -- a methyl isocyanate compound -- spread across the surrounding neighborhoods and slums as the people of Bhopal slept. Direct exposure to the substance reportedly killed 3,800 people during the night, while thousands of others fled the city and the expanding cloud of toxic fumes.

Almost three decades later, the gas has vanished, but Bhopal remains devastated by the toxic leak. The company responsible for the disaster was a majority-owned subsidiary of Union Carbide, which itself is now a subsidiary of Dow Chemical. The story of Bhopal has been unearthed because of Dow's prominent role as a key sponsor in the 2012 Summer Olympics.

A controversial Summer GamesLondon's 2012 Summer Olympics were supposed to be the "first truly sustainable Olympic Games," according to organizers. Contrasting with Beijing's over-the-top production, London aimed to leave a legacy of environmental responsibility. Dow's sponsorship (to say nothing of co-sponsors BP and Rio Tinto) has put that legacy in serious jeopardy. The relationship between Dow, Bhopal, and Olympic sustainability triggered protests and anti-greenwashing campaigns, while provoking outcries against globalization. We believe the story of Bhopal and Dow should be shared with investors to encourage corporate transparency around the world.

We also believe Dow can reverse this public relations nightmare by taking responsibility for Bhopal on the global stage of the Olympics. As outlined below, we propose a very clear, simple, and fair solution. We strongly encourage readers to share this article to bring further attention to an important issue. We recommend financing a Bhopal remediation effort through a public stock offering, a move that would boost Dow Chemical's reputation and, most importantly, provide the people of Bhopal with the services and health care they desperately need.

The disaster and the devastation that followedFor Americans, the disastrous gas leak is a distant memory, but the aftermath burdens the daily lives of Bhopal citizens even today. While figures vary widely, several accounts estimate the disaster ultimately led to 20,000 deaths, and a 2006 Indian government affidavit stated that the leak caused 558,125 injuries. Those numbers continue to grow because of the hazardous waste that remains at the crumbling insecticide plant. The city has become a symbol of broken governance, legal maneuvering, and extreme human suffering.

Originally, Union Carbide claimed the gas leak was a result of sabotage. However, plaintiffs in a 1998 civil suit in India revealed a laundry list of safety issues that were contributing factors to the catastrophe. Among these were poor maintenance, failure to implement safety precautions, and evidence that cost-cutting measures increased the severity of the disaster. Reports have noted that the safety equipment and procedures in place in Bhopal were seriously lacking compared to those of similar U.S.-based plants.

Following the disaster, Union Carbide failed to appear in court for trial in India, and eventually reached a settlement, agreeing to pay $470 million in 1989, which amounted to $1,500 per death and $550 per contaminated individual. The figure was substantially reduced from the $3.3 billion original claim presented by the Indian government and seems drastically low given the lingering adverse health effects of the gas leak. Unusually high instances of cancer, respiratory difficulties, immune and neurological disorders, near-blindness, reproductive difficulties, and heart problems continue to afflict the survivors. Bhopal's miscarriage rate is now seven times the average in India . Moreover, no one under the age of 18 was registered as a victim during the aftermath, yet the number of children exposed to the gas is estimated to be over 200,000.

Adding insult to injury, some 425 tons of hazardous waste remain on the grounds of the old factory today. Little has been done to clean up or remove the various chemicals, which continue to seep into the ground and pollute the local drinking water. The Indian government ships fresh water, but the deliveries are highly irregular. As a result, slum-dwellers are left with no choice but to drink the tainted groundwater.

To make matters worse, the slums expanded around the site because of the relatively low cost of nearby land. The inhabitants, already crippled by extreme poverty, develop chronic and debilitating illnesses that burden their everyday lives. Their ability to work is diminished. Children raised in this area face twice the risk of dying as do children elsewhere, partly because their parents cannot care for them adequately. Surprisingly enough, despite the serious health problems reported over the years, Union Carbide once claimed that methyl isocyanate was only a "mild throat and ear irritant."

Legal wrangling, scapegoating, and corruption have let persist an environmental cesspool that is destroying human life. Had Union Carbide or the government cleaned up the waste and provided an adequate water supply, as originally intended, countless birth defects and premature deaths could have been avoided.

Only recently has the Madhya Pradesh state government taken steps to address the crumbling factory site, which The New York Timesdescribed as a "wasteland in the city's heart." A German agency has agreed to remove 350 tons of waste over the course of the next year, all at Indian taxpayers' expense. While the local government had previously impeded studies on Bhopal's environmental contamination, the Madhya Pradesh government's willingness to let the German agency remove the waste is a hopeful sign. Still, the epic mess that began over a quarter-century ago is far from over. Who can -- and should -- help the remaining victims and put an end to the ordeal once and for all?

Why Dow should assume responsibilityFor nearly three decades, the companies involved and the Indian government repeatedly deflected responsibility for the Bhopal disaster. The plant's operator at the time of the leak, Union Carbide India Limited, was spun-off from the Union Carbide Corporation after the disaster, but by then the plant had closed permanently and the assets and liabilities were no longer on UCIL's books. After an extended round of the blame game, the responsibility for Bhopal fell into a black hole while Bhopali citizens continued to suffer.

We conducted a careful analysis and believe all roads lead to Dow when it comes to Bhopal's environmental liabilities. One by one, let's dissect and rebut Dow's arguments:

The Indian government should take responsibility for the Bhopal site.Both India and the U.S. adhere to the "polluter pays" principle, which states that the producer of pollution must pay for its consequences. Union Carbide was the polluter, and the continued existence of severe health problems and toxic waste in Bhopal shows that Union Carbide never fulfilled its responsibility. Further, Union Carbide signed a lease with the Indian government, promising to return the site "in its original condition." Even though the Indian government does in fact own the site now, Union Carbide failed to fulfill its original obligation.

If Union Carbide owned the Bhopal plant, Dow bears no responsibility.In 1984, Union Carbide owned the plant. A decade later, Union Carbide claimed that the plant was sold during an auction in 1994. However, contradictory to that claim, the plant was no longer on the books at the time of the auction. Instead, the Indian government had shut down the plant, and the legal ramifications of the pollution were still being resolved. In 2001, Dow acquired Union Carbide for $11.6 billion and the two entities became one and the same. So when we write "Dow," think "Union Carbide." Union Carbide describes the relationship in its annual report: "Union Carbide's business activities comprise components of Dow's global operations rather than stand-alone operations."

Dow bought Union Carbide free of liabilities.According to international law, the principal of "successor liability" requires the purchaser to gain both the assets and liabilities of the target. So, along with the wealth of assets acquired from Union Carbide, Dow should also be responsible for the environmental and health damage Union Carbide caused in Bhopal.

There is no precedent for Dow assuming Union Carbide's liabilities.A Dow spokesperson has pointed out that providing funds for Bhopal is out of the question since it would open up the company for additional liabilities. However, after purchasing Union Carbide in 2001, Dow acknowledged its responsibility for asbestos liabilities from American incidents involving Union Carbide dating back to 1972. In fact, Dow set aside $2.2 billion to resolve the asbestos issues. So Dow recognizes that "successor liability" applies, yet it ignores the inherited liabilities of the Bhopal disaster.

Union Carbide settled the claim years ago.The Indian government's $470 million settlement with Union Carbide represented 15% of the original $3.3 billion claim, and left victims with about $550. Dow Public Relations Officer Kathy Hun once asserted that "$500 is plenty good for an Indian." According to The Bhopal Reader, "It was widely believed that the courts had been pressured or influenced by the [Indian] Congress government ... and that the government had made a private deal with Union Carbide." To this day, Dow has continued to pressure the Indian government to keep the company free of liability, acknowledging that the debt is not fully paid and the criminal case not entirely resolved. In a 2006 letter to the Indian ambassador, Dow CEO Andrew Liveris sought assurance Dow had no further responsibility at Bhopal "to ensure that we have the appropriate investment climate."

Eveready Industries should be liable.While Eveready Industries did purchase Union Carbide India Limited, Union Carbide's Indian subsidiary, in 1994, the Bhopal plant had long been closed, so there was no transfer of the site and its liability to Eveready. Union Carbide owned and operated the Bhopal site, so Union Carbide (and now Dow) should be held liable according to the "polluter pays" principle.

A company should take responsibility for the environmental damage caused by its operations. Since Dow acquired Union Carbide outright in 2001, this responsibility should lie with Dow, but thus far the U.S. courts have disagreed. Untangling the legal liability is outside of our focus, however, and the mistakes by the Indian government only made the legal mess worse. Ultimately, Dow should remedy the situation for ethical reasons, and establish an entirely new precedent.

This type of convoluted legal maneuvering by Union Carbide and Dow is not a new story. In Ecuador, beginning in the 1960s, Texaco discharged billions of gallons of oil waste directly into the Amazon rainforest, creating an oil spill that ruined the lives of countless indigenous people. Chevron, after acquiring Texaco (and its liabilities!) in 2001, has refused to pay the $18 billion fine ordered by Ecuadorian courts, claiming fraud. In a company statement, Chevron argues that PetroEcuador, the state-owned oil company that took over Texaco's facilities after 2001, should be held responsible. Sound familiar?

As these cases illustrate, multinational companies can use legal loopholes to shirk their responsibilities in developing countries. Some of the world's richest companies profit at the expense of some of its poorest citizens. Meanwhile, shareholders in these companies often remain oblivious to the true nature of these transactions.

A solution to this continuing tragedyDow's management team, employees, and shareholders should capitalize on the unique opportunity the company has as a sponsor of the 2012 Olympic Games. While Dow has no legal obligation, Dow has an ethical obligation to right this wrong, a move that will end up benefiting Dow in the long run. Independent of the Indian government, Dow should create a Bhopal relief fund immediately to accomplish the following:

End unnecessary human suffering.Dow must take responsibility for the survivors' health and rehabilitation. While the Indian government has attempted to finance a health insurance policy for victims, the effort failed because of bureaucracy and corruption. Dow should buy a group insurance plan to ensure people receive the care they deserve, while adhering to the "polluter pays" principle.

Build health care facilities.Dow must provide ongoing access to treatment for the individuals affected by the Bhopal disaster. Allow organizations representing victims to participate and conduct research to better understand the afflicting illnesses.

Clean up the site.A thorough cleanup is of utmost priority to prevent further exposure to toxic soil and groundwater. Beyond removing the waste, cleanup will include decontaminating the soil and water to remove all traces of the toxic chemicals and will ensure that Dow's liability does not keep growing.

Estimating the cost of the above actions is difficult. At this point, only the Indian government has access to critical information about the site and victims, and its studies recently estimated that just over $1 billion would be an appropriate comprehensive total. We outline below how Dow could finance at least half this amount (perhaps much more) soon after the 2012 Olympic games:

1. Conduct a subsequent stock offering ($540 million investment)Dow's board of directors should propose a 1.5% dilutive stock offering, which would result in 18 million new common shares. Such an offering would raise approximately $540 million at Dow's current share price of $30, all of which would be committed to the Bhopal Relief Fund.

Initially, shareholders might balk at the idea of diluting their claim on the company's earnings. The recommended sum, $540 million, may give investors sticker shock, but this isn't an unusual move for the $36 billion company. Just last year, Dow issued 9.2 million new shares, half the amount proposed here. Even if shares drop initially, Dow's support would help erase a liability that management has ignored for over a decade. We think the market could interpret Dow's approach positively, if the company communicates the proposal effectively.

At the Fool, we encourage buy-and-hold investing practices, and shareholders with a similar outlook would recognize the move as an intangible investment in Dow's reputation. Investors should urge Dow to rise above its legal maneuvering and make a long-term investment by aiding the victims of Bhopal.

2. Sponsor an Olympic fundraising campaign ($10 million investment)In addition to the stock offering, Dow should raise funds through a widespread campaign announced during the Olympics. Thus far, Dow's Olympic sponsorship has resulted in utter outrage in London and India. A motion in March 2012 to terminate Dow Chemical's Olympic sponsorship was only narrowly rejected in an 11-10 vote by the organizing committee.

The backlash has yet to subside, but Dow could change public sentiment during the London Games. Dow should announce the launch of a $10 million campaign to raise awareness for the people of Bhopal, calling attention to its intent to remediate Bhopal during one of the most widely watched events in the world.

While it's impossible to estimate third-party donations resulting from such a campaign, the response could be significant. Dow's willingness to take action despite its lack of legal obligation would set an important precedent in corporate America.

Overall, Dow's contribution would go a long way in addressing its liability to Bhopal inherited from Union Carbide. Dow would be committing more than half of the $1 billion requested by the Indian government. This is a fair and reasonable approach that would prevent Dow from paying for the government's inaction and missteps over the years. At the same time, this move would show that Dow has decided to rise above the legal mess, take responsibility for its subsidiary's negligence, and do what is ethically right.

Why now?Dow's refusal to take responsibility for Bhopal has hit the company's bottom line well beyond the associated legal costs. The unaddressed liability has hurt its reputation, resulted in protests and media backlash, and even limited its ability to invest overseas. One activist organization went so far as to pose as a Dow spokesperson on the BBC, claiming responsibility for the Bhopal disaster, and consequently causing a sell-off in European markets that erased $2 billion worth of Dow's market cap (which was recovered when the hoax was revealed).

Despite Dow's disregard for Bhopal, the company's "human element" advertising campaign allegedly "showcases Dow's commitment to addressing global economic, social and environmental concerns." Now is the time for Dow to embody this uplifting message it has paid millions to publicize. By taking action for Bhopal, Dow has an opportunity to rebuild its brand and become the paradigm for corporate social responsibility.

Dow's employees, shareholders, and even the broader investing community have something at stake. Dow's reparations would pay back a debt to thousands of victims that had previously been excluded from its balance sheet, creating transparency in an opaque reporting environment. This approach should be championed across the business world.

We're forwarding this article and our proposal to Dow's 10 largest institutional investors. Alone, these 10 institutions hold 42% of the company, but there are millions of other shareholders. Every Dow investor should use his or her voice to support a resolution to help the people of Bhopal. There is no better time than now for Dow to live up to its advertising campaign and demonstrate the ideals of the Olympic Games.

How can you help? Our goal is to spread the word about a tragedy that many Americans had never heard of or scarcely remember. Share this article with friends and family, and tell them about the Bhopal tragedy. Also, contact the Dow Investor Relations Office at 1-800-422-8193 and voice your concerns about Dow's role as an Olympic sponsor.

In addition, you can learn more about Dow and the disaster through the following outlets: